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Much ink has been spilled on Bitcoin and its smaller cryptocurrency siblings. I’ve recently thought a lot about the impact of cryptocurrencies on financial systems and on the world at large. While I do not expect that any conclusions may stand for long, I’ve tried to sum up what I understood so far and digest it for my readers here. Apologies for any technical inaccuracies – please highlight them in comments.

First, a few thoughts on what’s new and different about Bitcoin:

The intellectual and technical work that Bitcoin stands on, my geekier friends agree, is an astonishing leap forward from everything we’ve seen before. Satoshi Nakamoto is not one person, as multiple disciplines from cryptography to software engineering were involved in its conception, but may have been a small group of people with the extraordinary discipline to publish some brilliant open source code and yet not to come forward and reveal themselves, at least so far. Code that is an achievement in that it is not just smart, but also amazingly robust. If Satoshi Nakamoto were one person, his achievements would be on par with those of Sir Tim Berners-Lee.

The main reason why it’s difficult to explain Bitcoin to people is that it’s a system where flows, not stocks, are certified. If I start with $100 in my bank account, I deposit $50, and then I take out $30, my bank knows what I did, knows that I have a new balance of $120, and can print me a statement with that balance. If I do the same with Bitcoin, all that’s monitored is the flow: “in 50” and “out 30” are recorded on a ledger replicated on thousands of servers all over the world, but my new balance of 120 – just like my old balance – is strictly my information, and nobody else has it. The Bitcoin community validates the flows; the algorithm cares not one bit about stocks.

The total quantity of Bitcoin in the Bitcoin system is algorithmically predetermined, and in that sense is the only stock that matters to the system. This also means that, at some point (roughly around the year 2140), mining will stop and the quantity of Bitcoin will be fixed. No central bank, commercial bank or other authority will be able to print more. As we’ll see below, this has important macroeconomic implications.

Other things that strike people as weird are that Bitcoin is strictly a bearer instrument (you lose it, you have no recourse) and that transactions, once validated, are irreversible – unlike with your credit card or your PayPal account, there is no chargeback mechanism. Transactions are final.

Most importantly, a “trustless” network that keeps working with no central authority and never collapses – because trust is distributed and resides in the consensus mechanisms that enables the endless replication of the blockchain – is in itself a concept that takes a bit of time getting used to.

Economists are intrigued, but do not believe that at a macro level Bitcoin can power a sophisticated economy. While the developer community is working to overcome this limitation, for example, Bitcoin as it stands today can carry out only a limited number of transactions: 7 transactions per second. (Visa, depending on which source you believe, is said to support 10,000-50,000 per second).

Also, there is not enough Bitcoin in the system, and there never will be enough for a significant world economy to adopt it to the exclusion of other currencies. If output is to grow and the quantity of money cannot grow, deflation wreaks havoc because the debt in the system becomes unsustainable. And “debt is to capitalism that which Hell is to Christianity: seriously unpleasant but absolutely necessary”, claims economist Yanis Varoufakis (yes, he who just became Finance Minister of Greece).

Regulators are walking a fine line. Err on the side of protecting consumers from risk, and you stifle innovation; err on the side of fostering innovation, and a lot of people will go bust. Not because the Bitcoin technology per se is unsafe, but because issues come up at the edge, in the wallets and exchanges that sit at the crossroads of Bitcoin and fiat currencies. The blockchain is resilient and continues to function when mayhem happens, but people get burned.

London is trying to ride the Bitcoin wave, with a light regulatory touch and a Chancellor of the Exchequer who has voiced support for cryptocurrencies as an enabler of financial innovation – although the Treasury review he commissioned is taking longer than expected. New York State is working on a “BitLicense” regulatory framework, although critics say it is too restrictive for New York to become a Bitcoin hub. The US Commodities Futures and Trading Commission says Bitcoin is a commodity, not a currency, and falls under its remit. The European Central Bank and the European Banking Authority have highlighted risks for consumers, recommended that banks refrain from buying or holding bitcoin, and then mostly kept silent: one gets the feeling that they would really rather see the whole headache go away. But Bitcoin has no borders, does not reside anywhere and recognizes no nations: shouldn’t we aim for a global framework, instead of burdening the ecosystem with incompatible rules, lack of interoperability, and unsustainable compliance costs?

Financial institutions, though listening to regulators out of one ear, are eager to become players in the Bitcoin economy, or at least to be seen as such. See the recent investment by, among others, BBVA and the NYSE in Coinbase.

There already are better ways than Bitcoin to implement an alternative and decentralized payment network. Ripple, although not perfect, is said to be one. Stellar is another one.

What’s next?

Expecting that Bitcoin will be a major world currency five or ten years from now would be a bit like betting in 1995 that AOL would be the dominant Internet service in 2015. It’s still very early days. The entire Bitcoin system is barely six years old. We haven’t seen anything yet, really.

In addition to finance, there are a lot of things you can do with a system that decentralizes the hard work of certifying a transaction between two parties. Indeed, some go so far as to say that Bitcoin isn’t the point of the Bitcoin technology: “Bitcoin as a currency has been a red herring driven by speculative investment, but that’s not the ultimate potential or the most exciting thing about it” (Coinbase CEO Brian Armstrong, quoted in Quartz). In other words, a virtual currency is just one application enabled by the blockchain: it has been and is important as an incentive to participants (miners) and to create liquidity in the system, but it won’t be the only use of the technology in the future.

Sidechains – ledgers that experiment with features that might be added the Bitcoin core, or might serve some entirely new purpose, without actually jeopardizing the stability of the blockchain – will be big. See Austin Hill and Adam Back’s Blockstream, which is now backed by Reid Hoffman.

Under so-called “Bitcoin 2.0” frameworks, you can make money programmable, for example tag a certain bitcoin for spending only with certain counterparts. You can also have a bitcoin represent other types of assets than money, such as a car, a company share, a vote in an election (video).

The most ambitious project inspired by the Bitcoin blockchain (but entirely separate from it) seems to be Vitalik Buterin’s Ethereum, not just a platform allowing for contracts written as computer code, but an entire scripting language and programming environment to create an ecosystem with self-enforcing contracts, distributed autonomous corporations, and perhaps entirely novel models for political organizations.

Would a software-based societal model be resilient enough to cope with the real world, or would it be too brittle to withstand shocks by reacting intelligently? Would the utopistic libertarians willing to delegate a part of their life to a blockchain risk waking up in a dystopia of inequality, polarization and control? Hard to say. What we can say is that as a society we need to understand the technology, weigh the upside potential against the risks, and make collective choices that will serve us well for the future.

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You might say that my antennae are finely tuned to issues of gender in the workplace as reported by the media, but the latest crop of interesting reads has been, if ever, more depressing than usual. I will not dwell on the vicious backlash against women who brought to the media’s attention physicist Matt Taylor’s poor outfit choice in a press conference about a comet landing – if only because I tend to defend women’s right to wear whatever the hell they want -, other than to quote writer Roxane Gay (someone I will return to) and her essay “Blurred Lines, Indeed” (previously published as “What men want, America delivers“): “It’s hard to be told to lighten up because if you lighten up any more, you’re going to float the fuck away. ”

So, here is a multi-industry selection of recent articles pointing to the inescapable fact that, again in Gay’s words, “the problem is not that one of these things is happening, it’s that they are all happening, concurrently and constantly”:

In finance: “When I was younger, I assumed that it would change. […] The results of this generational experiment are now in and they are pathetic.” From “Men alone should no longer run finance“, John Gapper, Financial Times, Dec. 3, 2014.

In asset management: “One in five women in asset management has suffered sexual harassment at work… another third of female asset management staff had experienced sexist behaviour at work on a weekly or monthly basis… 15 per cent had felt pressured to exploit their sexuality at work…” From “Sexism still plagues fund management“, Chris Newlands and Madison Marriage, Financial Times, Nov. 30, 2014.

In technology: “Women make up a tiny fraction, roughly 15%, of people working in technical roles in the tech industry. And amazingly, that percentage is dropping, not rising. Multiple studies have found that the proportion of women in the tech workforce peaked in about 1989 and has been steadily dropping ever since. […]The women I know in tech are tough, resilient and skilled [… ] The women who quit tech aren’t fragile. I think they’re fed up.” From “Why women are leaving the tech industry in droves“, Sue Gardner, LA Times, Dec. 5, 2014.

In videogames: “The campaign grew and morphed and got a name, “gamergate.” Very few people came out looking good in the ensuing hashtag war—an example of social media at its worst, with childish insults, sarcasm, disingenuousness, and threats of rape and other violence. […] Unfortunately, law enforcement hasn’t shown a willingness to take online threats seriously.” From the weirdly titled “The Gaming Industry’s Greatest Adversary Is Just Getting Started” (does one really become the greatest adversary of the industry by way of cultural criticism?), Sheelah Kolhatkar, BloombergBusinessweek, Nov. 26, 2014.

This latter article prompted an interesting discussion among some of my Facebook friends, in particular a (male) friend claiming that videogames aren’t really that bad in their depiction of women, and that the academic in question – Anita Sarkeesian – was overrreacting to online haters’ threats, since they are rarely carried out. I find it hard to describe the frustration I felt. Here was a man – a good friend, and not someone I believe would indulge in online hate – telling me, a woman, that another woman was wrong to fear for her safety. Perhaps this is what black males in Ferguson feel like when they are told by white authorities that the police is there to protect them, I replied.

But the point is, I don’t really know what black males in Ferguson feel like. I can attempt the necessary exercise in empathy – as one does, for example, in storytelling of many sorts -, but outside that exercise I can only truly speak to what I feel, if and when I am able to articulate it. If the lottery of life has allowed me a privilege, it is my job to be aware of it, just as it is for others who have a different type of privilege. I learned this in another of Roxane Gay’s essays, “Peculiar Benefits” (you can find it, along with the one quoted above, in her collection Bad Feminist), which suggests the beginning of a personal agenda for each of us who is somehow privileged:

There is racial privilege, gender (and identity) privilege, heterosexual privilege, economic privilege, able-bodied privilege, educational privilege, religious privilege and the list goes on and on. At some point, you have to surrender to the kinds of privilege you hold because everyone has something someone else doesn’t. […]

We tend to believe that accusations of privilege imply we have it easy and because life is hard for nearly everyone, we resent hearing that. Of course we do. Look at white men when they are accused of having privilege. They tend to be immediately defensive (and, at times, understandably so). They say, “It’s not my fault I am a white man.” They say, “I’m working class,” or “I’m [insert other condition that discounts their privilege],” instead of simply accepting that, in this regard, yes, they benefit from certain privileges others do not. To have privilege in one or more areas does not mean you are wholly privileged. […]

You don’t necessarily have to do anything once you acknowledge your privilege. You don’t have to apologize for it. You don’t need to diminish your privilege or your accomplishments because of that privilege. You need to understand the extent of your privilege, the consequences of your privilege, and remain aware that people who are different from you move through and experience the world in ways you might never know anything about. They might endure situations you can never know anything about. You could, however, use that privilege for the greater good–to try to level the playing field for everyone, to work for social justice, to bring attention to how those without certain privileges are disenfranchised. While you don’t have to do anything with your privilege, perhaps it should be an imperative of privilege to share the benefits of that privilege rather than hoard your good fortune. We’ve seen what the hoarding of privilege has done and the results are shameful.

This should be, perhaps, if enough people in good faith agree, a way to move forward.

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I caught up on Stanford Business magazine today. Let me share a quick story told in the Class Notes written by my classmate John D. Lee. He is a financial advisor, and may have a professional perspective on money that most of us lack. Yet, all of you readers can replicate the experiment with your families, if you wish.

In appreciation for all that we have (and just as an interesting experiment), we attempted to approximate what it would be like to live at the poverty level for one week. We confined ourselves to using one bedroom, one bathroom, and the kitchen as our entire family’s living quarters (though our dog, Nero, chose to ignore those rules). Except for when our jobs required it, we stopped using iPods/iPhones, the internet, and cable TV/TiVo. Our total food budget for the family was $108 for the week, and we made a donation to a local homeless shelter with the money we saved. While none of us particularly enjoyed the experience (and eating so much beans and rice), I thought it was good for our 9-year-old son, Archie, and we all came away more appreciative of our good fortune. Archie’s insight was that the thing he liked the least about the experience was the loss of freedom and choice. Truth!

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You knew that Nassim Nicholas Taleb’s Antifragile was in my reading list: having read it, I now owe you a review. Taleb’s The Black Swan was a book I found not only clever and innovative, but engaging and somehow necessary (for reference, here is my 2007 Black Swan review); Antifragile, rather less so.

What is antifragile? Taleb has coined the neologism to describe a class of things that “benefit from shocks”: “thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty.” “Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.” It is a property of living beings that Taleb describes in mathematical form (convexity) and proceeds to apply to ideas, cultures, political systems and much more. He is least interested in the application of the idea to the “vulgar” world of finance, perhaps feeling that the events of the past few years have abundantly proved his point.

Notwithstanding the author’s ambition, scope and breadth of intellectual interests, let me say right away that this would be a bigger book if it didn’t hit the reader in the face repeatedly with bitterness, sarcasm and contempt. The deeply held opinions of the author may not have changed since his previous books; his tone, I think, has – and not in favor of readability. Just witness the ad personam taunting and teasing directed at certain people (Thomas Friedman, Paul Krugman, Joseph Stiglitz, Robert Merton) and schools (“The Soviet-Harvard delusion”); the author’s scorn for entire professions, such as academia and management; his rants against large corporations, with the exception of Apple (!), and disdain of corporate leaders, except for Steve Jobs. Passages like this may be occasionally entertaining to the reader, but grow to be too much:

The historian Niall Ferguson and I once debated the chairperson of Pepsi-Cola as part of an event at the New York Public Library […] Neither Niall nor I cared about who she was (I did not even bother to know her name). […] My experience of company executives, as evidenced by their appetite for spending thousands of hours in dull meetings or reading bad memos, is that they cannot possibly be remarkably bright. […] Someone intelligent—or free—would likely implode under such a regimen.

The most convincing arguments in the book are about medicine and diet. Which is somewhat surprising from a non-specialist writer, until you remember that most medical and nutrition professionals have a bias for intervention (medicate, perform surgery, keep you on a diet, sell you supplements), when subtraction (not intervening and removing things instead) would often just work as well. They therefore live an implicit conflict of interest, the paradoxical result of which is “if you want to accelerate someone’s death, give him a personal doctor”. Taleb is right to call the reader’s attention to iatrogenics, the (usually hidden or delayed) damage from treatment in excess of the benefits. His ideas on diet also make sense: our bodies benefit not just from variety of nutrients, but from some “randomness in food delivery and composition” and some stress in the form of periodic deprivations (such as in the Orthodox lent) and occasional fasting. Even here, though, the author’s Levantine superiority complex (and don’t you forget that Steve Jobs’s ancestors came from Syria!) gets to be rather quirky:

I, for my part, resist eating fruits not found in the ancient Eastern Mediterranean (I use “I” here in order to show that I am not narrowly generalizing to the rest of humanity). I avoid any fruit that does not have an ancient Greek or Hebrew name, such as mangoes, papayas, even oranges. Oranges seem to be the postmedieval equivalent of candy; they did not exist in the ancient Mediterranean. […] As to liquid, my rule is drink no liquid that is not at least a thousand years old—so its fitness has been tested. I drink just wine, water, and coffee.

His brief critique of Singularity efforts follows logically from his arguments, but is delivered with the recurring scornful attitude. Well, at least he remembers the fellow’s name:

I felt some deep disgust—as would any ancient—at the efforts of the “singularity” thinkers (such as Ray Kurzweil) who believe in humans’ potential to live forever. Note that if I had to find the anti-me, the person with diametrically opposite ideas and lifestyle on the planet, it would be that Ray Kurzweil fellow. […] While I propose removing offensive elements from people’s diets (and lives), he works by adding, popping close to two hundred pills daily. Beyond that, these attempts at immortality leave me with deep moral revulsion.

The least convincing arguments in the book are those in praise of entire economic systems based on “small is beautiful” (going hand in hand with the author’s love for the Swiss political system). Taleb rightly praises small entrepreneurs for their risk-taking: even if small businesses are individually fragile (as in the example of restaurants) or merely robust, even harboring a bit of antifragility (taxi drivers), their ecosystem (the restaurant scene) becomes antifragile. And he is right to point out that size can make you fragile: it is probably true that large projects are intrinsically over time and over budget due to intrinsic negative convexity, and that “the problem of cost overruns and delays is much more acute in the presence of information technologies”. Yet, one cannot seriously propose the London Crystal Palace (an overgrown conservatory built in 1850-51) as a model of architectural effectiveness, let alone human achievement, today.

It seems to me that in deliberately ignoring that it is mostly large organizations that create large economic surpluses, Taleb gets way too close to the current “degrowth” narrative, a crackpot economic proposition if there ever was one. While he openly despises large corporations and the people who work in them, he seems happy to write up his books on a computer built in a very large factory in China (as long as it is a subcontractor for Apple), to have his writings published by very large publishing houses, and to fly in planes built by large corporations and run by other large corporations (even while pointing out the fragility of air traffic control systems), for example to meet interesting people in Davos, at a large annual World Economic Forum gathering that would not exist if there were no very large corporations to sponsor it. Even the aforementioned New York Public Library is probably a much too large and bureaucratic organization for his taste, given that his model for an antifragile life and thinking is the “flâneur with a large private library”, no doubt acquired via independent (often antiquarian) booksellers.

With the exception of, say, drug dealers, small companies and artisans tend to sell us healthy products, ones that seem naturally and spontaneously needed; larger ones— including pharmaceutical giants— are likely to be in the business of producing wholesale iatrogenics, taking our money, and then, to add insult to injury, hijacking the state thanks to their army of lobbyists. Further, anything that requires marketing appears to carry such side effects. […] There is no product that I particularly like that I have discovered through advertising and marketing: cheeses, wine, meats, eggs, tomatoes, basil leaves, apples, restaurants, barbers, art, books, hotels, shoes, shirts, eyeglasses, pants (my father and I have used three generations of Armenian tailors in Beirut), olives, olive oil, etc.

Eyeglasses? Last time I checked mine, Luxottica had made those – and Luxottica is a very large multinational that has long abandoned its “small is beautiful” stage. Maybe Mr. Taleb orders his glasses from Warby Parker – fine. But do Warby Parker’s owners really not want to grow it into a much larger company? And does Mr. Taleb like a glass of vintage Chateau d’Yquem less than a Greek retsina, knowing that Chateau d’Yquem is owned by LVMH, a large corporation, and not a small artisan?

In summary, Antifragile is a thoughtful book with much to recommend it for, and you should read it if you like the author’s broad, non-academic erudition, share his reverence for ancient history and Mother Nature, and don’t mind his personal quirks too much; but the book’s flaws in tone of voice – and, sometimes, in argumentation – make it less strong than it otherwise could have been.

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No one can know for certain what future investment returns will be. If the writers at The Economist were sure of the answer, they would be lounging about on their luxury yachts instead of sweating over split infinitives.

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Europe will have to make its choice this year. Either a much tighter, more constrictive fiscal union with a central bank that can aggressively print euros in this crisis, or a break-up, either controlled or not. I don’t think they can kick the can until 2013, as the market will not allow it. Either the ECB takes off its gloves and gets down to real monetization when Italy and Spain need it, or the wheels come off.

If you want to understand what’s going on in global financial markets, go to John Mauldin’s site and subscribe to his free weekly newsletter Thoughts from the Frontline. Every week he pores over analyst reports, travels, talks to a lot of people who know what’s going on behind the scenes, and sits down to package thoughts, numbers and charts to be conveniently delivered to your inbox to provide you with food for thought. Also from this week’s newsletter: this is what the Greek default looks like.

Greece has two choices. They can choose Disaster A, which is to stay in the euro, cutting spending and raising taxes so they can qualify for yet another bailout; negotiating more defaults; getting further behind on their balance of payments; and suffering along with a lack of medicine, energy, and other goods they need. They will be mired in a depression for a generation. Demonstrations will get ever larger and uglier, as the government has to make even more cuts to deal with decreasing revenues, as 2.5% of their GDP in euros leaves the country each month. There is a run on their banks. Any Greek who can is getting his money out.

Greek voters will then blame whichever political group was responsible for choosing Disaster A and vote them out, as the opposition calls for Greece to exit the euro. Which is of course Disaster B.

Leaving the euro is a nightmare of biblical proportions, equivalent to about 7 of the 10 plagues that visited Egypt. First there is a banking holiday, then all accounts are converted to drachmas and all pensions and government pay is now in drachmas. What about private contracts made in euros with non-Greek businesses? And it is one thing to convert all the electronic money and cash in the banks; but how do you get Greeks to turn in their euros for drachmas, when they can cross the border and buy goods at lower prices, as inflation and/or outright devaluation will follow any change of currency. It has to. That is the whole point.

So how do you get Zorba and Deimos to willingly turn in their remaining cash euros? You can close the borders, but that creates a black market for euros – and the Greeks have been smuggling through their hills for centuries. And how do you close the fishing villages, where their cousin from Italy meets them in the Mediterranean for a little currency exchange? What about non-Greek businesses that built apartments or condos and sold them? They now get paid in depreciating drachmas, while having to cover their euro costs back home? Not to mention, how do you get “hard” currency to buy medicine, energy, food, military supplies, etc.? The list goes on and on. It is a lawyer’s dream.

There is a third choice, Disaster C, which is worse than both of the above. Greece can stay in the euro and default on all debt, which cuts them off completely from the bond market for some time to come. This forces them to make drastic cuts in all government services and payments (salaries, pensions etc.), and suffer a capital D Depression, as they must balance their trade payments overnight, or do without. Then they choose Disaster B anyway.